Tax Planning Strategies: Considerations for Lawsuit Settlements and Deferred Payments

As the end of the 2024 tax year approaches, individuals are rushing to make payments that can be deducted before year-end. Due to the expiration of the Trump tax cuts, there may be changes in tax planning strategies. Taxpayers should aim to accelerate tax deductions and defer income where possible, but should be cautious of constructive receipt. Effective tax deferral planning strategies include timing payments and negotiating for deferred payments before providing services.

When settling a lawsuit, it is advisable to insist on installment payments in the settlement agreement before signing. This is not considered constructive receipt as the signature is dependent on receiving payment in a specific way. It is important to consider the tax implications of legal settlements and fees, as they may be subject to IRS taxation. Failure to plan ahead may result in receiving an unexpected IRS Form 1099.

Receiving a settlement in installments is not considered constructive receipt as long as the payment is conditioned on certain terms. This differs from delaying acceptance of a paycheck. It is crucial to consider the tax implications of legal settlements and fees, as the IRS may issue a Form 1099 if not properly planned for.